After a prolonged period of drought in the tech IPO market, Wall Street’s tech IPO bankers finally had a reason to celebrate this week with the market debuts of Reddit and Astera Labs. The last significant IPOs of notable venture-backed tech companies in the U.S. were Instacart and Klaviyo in September, marking a dry spell that lasted until late 2021. According to University of Florida finance professor Jay Ritter, there have only been 15 tech IPOs in the past two years, a stark contrast to the booming market in 2021 when 121 tech companies went public, the most since the dot-com bubble in 2000.
In the latest tech IPOs of Reddit and Astera Labs, Morgan Stanley emerged as the big winner among banks, securing the lead left spot on both IPOs. This was a significant win for the bank after facing cutbacks and job losses due to the downturn in initial public offerings. In contrast, Goldman Sachs had led the only two big venture-backed offerings in the previous year, setting the stage for a competitive landscape among investment banks vying for lucrative IPO deals.
Market experts view the recent uptick in tech IPO activity as a sign of a potential resurgence in the coming months. New York Stock Exchange President Lynn Martin expressed optimism about the second quarter, indicating that many companies are gearing up to go public. The revenue generated from underwriting fees in the Astera and Reddit IPOs, although relatively small compared to overall bank revenues, could signal a revival in the investment banking unit after a period of decline.
The successful IPOs of Astera Labs and Reddit have resonated positively with investors, boards of directors, and management. Lise Buyer, founder of IPO consultancy Class V Group, noted that the market’s warm reception to these IPOs could potentially “open the floodgates” for more companies looking to go public. The investment banks’ involvement in IPOs extends beyond the initial public offering and could lead to future opportunities such as follow-on offerings, debt raises, and acquisitions, showcasing the long-term relationship-building aspect of these deals.
In an effort to attract high-valued customers, business partners, and company insiders, investment banks like Morgan Stanley are utilizing directed-share programs (DSPs) in IPOs. By setting aside equity for specific individuals or groups, banks hope to not only strengthen relationships with existing clients but also attract new customers for wealth management and other financial services. This strategy was successfully employed by companies like Airbnb, Rivian, and Doximity, showcasing the potential for expanding business opportunities beyond traditional IPO transactions.
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